How Green Living Can Lower Your Home Insurance Bills

The surprising solution to save the planet and its homeowners from rising premiums

U.S. homeowners paid an average of $864 annually for home insurance as of July 2013, about 21% more than they did just four years earlier, according to the HomeInsurance.com RateReport. Why? It’s complicated. So is a potential solution – green living – that could slow down the increases and potentially roll some of them back.

As most homeowners know, one important factor in calculating home insurance premiums is predicting risk of claims. When risks increase, so do premiums. One of the biggest risks these days is severe weather. Just look back to 2012 and Superstorm Sandy, which caused nearly $19 billion in insured losses, according to the Insurance Information Institute (III). And Sandy wasn’t the only problem in 2012: Thunderstorms resulted in more than $14 billion in insured losses, the second-highest amount in U.S. history, according to Munich Re, the New Jersey-based property and casualty reinsurance company.

When catastrophes such as these occur, it’s up to insurance companies to hold up their end of the bargain by footing the bill for covered losses. More natural disasters mean more big payouts, which is obviously bad for business.

In recent years, climate change has been linked to an upsurge in unusually severe storms. Even though the 2013 Atlantic hurricane season closed this year without any major storms, there’s a definite trend – over the last 30 years, some insurers have experienced an increase of up to 300% in weather-related catastrophic losses.

Here’s why it matters. Roughly 73% of home insurance premiums in 2012 immediately went toward recouping providers’ payouts and losses, according to the III. Considering payouts for insured losses that year reached $57.9 billion – more than double the average for 2000-2011 – it makes sense that many homeowners now pay more than ever for home insurance.

If the frequency and severity of insurance claims continue to increase, there’s no doubt that consumers will have to shell out more than ever for home insurance. Whether or not you believe climate change is to blame for the increase in catastrophic storms, one solution has emerged with promising impacts on reducing risk and lowering costs related to insurance: Going green.

The green effect: Now and later

The most exciting facet of sustainable living is that it can provide benefits now for policyholders and possibly long-term relief even for homeowners who wouldn’t know green construction from Green Day.

First, the immediate benefits. They’re available because greener building practices have proven to be safer and better able to withstand damage than conventional strategies. Additionally, homes that have been updated with greener features are better equipped to prevent major claims from accidents and other common perils. It seems only natural then that insurance companies hold one of the largest stakes in the Green Movement – both to combat climate change and to promote safer living.

Many top home insurance carriers reward LEED-certified homes for being safer and more durable with discounts of as much as 5% on qualifying premiums. It’s important to remember the reason for the reward; these homes have significantly lower risks for fire, weather damage and other expensive claims.

Here are just a few examples of green updates that have also proven to help reduce risk and prevent expensive home insurance claims:

Updated plumbing systems: Sustainable updates to your home’s plumbing fixtures could greatly reduce your risk of a burst pipe and other perils. Water damage is more common than you might think – accounting for nearly a quarter of all U.S. homeowners claims – and it costs about $7,000 per claim on average, according to the III.

Modern electrical wiring: Speaking of common home insurance claims, the National Fire Protection Association reports that a residential fire occurs in the U.S. every 82 seconds. Investing in an up-to-date, energy-efficient electrical system could save as much as $33,000 (the average homeowners insurance payout due to fire, according to the III) by reducing your risk of electrical fire.

Efficient HVAC systems: The harder your heating and cooling systems have to work, the more likely they are to wear out or malfunction. The National Fire Protection Association reports more than 2,500 home fires are attributed to failures in air conditioning systems every year. Installing sustainable alternatives could save both the costs of maintenance and help you avoid expensive property damage claims.

Insurers calculate your personal home insurance premium by predicting the likelihood you’ll file a large claim, causing your insurer to have to make a large payout. In general, the fewer claims you have to file, the more likely you are to qualify for lower home insurance premiums. On a larger scale, these reductions in risk could have major implications.

The powerful potential of sustainable building

Even if you don’t go green this year by installing the updates listed above, you could start feeling the economic effects of the Green Movement – and it could be sooner than you think. Already, more than 100 cities in the U.S. have passed legislation requiring tougher environmental standards for new homes and buildings, and spending on green homes is projected to reach as much as $114 billion by 2016, growing to as much as 38% of the entire residential construction market, according to a 2012 study by McGraw Hill Construction.

Consider what could happen to overall insurance rates as more and more homeowners invest in safer, updated home features such as the ones listed above. The frequency of claims would drop across the board, bringing down the total amount insurance companies have to pay out for property damage losses.

What does it mean for your personal premium? If your insurance company is suddenly paying a lot less to cover fewer claims, there’s no way you won’t feel the effects on your premiums – in a good way.